Mr Howard, delivering his farewell address to the Tories' conference in Blackpool, acknowledged that they "didn't come close" to winning the May General Election and cautioned that they cannot afford to sit back and wait for the electoral pendulum to swing in their favour.
He starkly warned activists: "No party has a God-given right to govern."
Mr Howard, who is quitting the job he has held since replacing Iain Duncan Smith in November 2003, urged the party to refrain from "bitterness and back-biting" as it goes about the job of choosing a new leader.
Once that leader is in place, the party should unite behind the individual for the whole of the Parliament, he demanded.
Although Mr Howard did not refer directly to his resignation, a letter confirming his departure will arrive on the desk of Sir Michael Spicer, chairman of the backbench 1922 Committee, tomorrow .
Once he receives Mr Howard's resignation letter, Sir Michael will declare that the leadership contest proper is under way.
Nominations will open immediately and close next Thursday, October 13.
The first ballot of MPs will come on Tuesday October 18, with further ballots to follow until the field is whittled down to two candidates, towards the end of October.
Shortly after the final ballot, the vote will go out to the party's estimated 300,000 members around the country.
Following an intensive month of campaigning by the two leadership rivals, the contest will end on Monday December 5, with the new leader unveiled on Tuesday December 6.
In an emotional speech - which aides said would be the last he delivers from a conference platform - Mr Howard told the Conference the party had made progress under his leadership and delivered an improved performance at the General Election.
However he conceded: "But at the end of the day we didn't win - and let's be honest with each other: we didn't even come close to winning.
"My best turned out to be not good enough."
He added: "A year ago I stood before you and stressed the importance of accountability. In the real world, I said ... if you screw up, you risk losing your job.
"And that's why I'm standing down: it's about keeping your promises; it's called accountability."
Mr Howard told his audience at the Winter Gardens: "My successor has a clear and simple task: to regain for our party the trust and respect of the British people.
"After this week, I know we can do it. But it will take a lot of hard work.
"If anyone here today thinks that we can just sit tight and wait for the pendulum to swing back to the Conservatives - think again."
Conservatives could be proud of their history, he said, but he added: "But no party - however much it has achieved in the past - is entitled to power in the future.
"No party has a God-given right to govern. There is no 'natural party of government'. The right to govern is a privilege we have to earn."
Mr Howard told activists that they have to demonstrate that the party is competent to govern and cautioned that "competence is built on discipline."
The party needed to debate important issues, said Mr Howard but he warned against being "offensive about each other" and "running down our party".
Mr Howard urged: "Let's show we can elect a new leader without bitterness and back biting.
"And then let's unite behind that new leader - not just for a year or two but for a whole Parliament, even when the going does get tough."
Mr Howard promised that whoever succeeds him will have his "utmost" support, adding: "And I expect each and every one of you to do the same."
The former Home Secretary acknowledged that the party had to embrace change but cautioned it against developing an obsession with "talking about ourselves, to ourselves, at Westminster."
The public have "high hopes for Britain" and the party had to embrace that positive approach.
"They're looking to the future, confident that Britain's best days lie ahead - and so must we."
A new generation of voters, the internet and iPod generation, are concerned about issues such as terrorism, climate change and the plight of Africa.
"We must talk about what matters to them in today's world - their world, the world as it is, not the world as it was," stressed Mr Howard.
He told activists that political correctness, "turbo charged by the Human Rights Act", is undermining the "precious British value of fair play."
Mr Howard warned against allowing special rules to apply to special interest groups.
"They blur the distinction between right and wrong. And they give the impression that some people are above the law," he cautioned.
Mr Howard, who faced criticism from many quarters for concentrating so heavily on immigration during the General Election campaign, defended that stance.
"We need to know who is coming into and leaving our country - that means controlling immigration.
"To me that is a statement of the blindingly obvious. It's not about shoring up some core vote. It's about protecting our country. And no-one - not Tony Blair, not Charles Kennedy, not the media, nor anyone else - will stop me from saying so."
Mr Howard said the party will take a balanced approach to the Government's proposals to toughen up anti-terrorism legislation.
"We have a simple test. No law should undermine the basic freedoms which we are seeking to defend. And we will not be reassured by promises that they will be used with common sense.
"Why? Because last week in Brighton a man, an 82-year-old man, was detained using anti-terror legislation because he dared to disagree with the Foreign Secretary. Legislation that very same Foreign Secretary had promised 'would not threaten in any way the right to demonstrate peacefully'."
Mr Howard urged that Conservatism "must once again become the language of hope: hope for those who live in poverty in our inner cities, hope for the immigrants who come and settle, hope for all those communities left behind and forgotten."Reuse content